Choppy markets bring back guaranteed return policies Guaranteed return policies that are structured similar to bonds are making a comeback in the life insurance industry. Such bonds had gone out of the market after LIC withdrew Bima Nivesh six years ago due to the falling interest rates. Choppy markets and risk-averse investors are now compelling private insurers to come out with guaranteed return products.
The difference this time is that it is the private sector that is offering these products. Earlier, insurers avoided such products because of the interest rate risks. This time round, the risk is lower because there are many triple A instruments in the market offering double-digit returns. Also, the return is being offered with caveats. Aviva has launched IndiaBond, a single premium, endowment plan with guaranteed compounded return of 7% per annum on maturity. For example, a policyholder paying a single premium of Rs 1 lakh for a policy term of 10 years, will get a total maturity benefit of Rs 1,96,715 plus life cover. Newcomer IDBI Fortis also offers a guaranteed return fund for ULIP investors. The fund offers a return of 8.5%. However, this return is on the money that is allocated into the fund and not the premium paid. In other words, charges will be deducted from the premium before the premium is allocated into the life fund. According to Kotak Life Insurance managing director Gaurang Shah, if these products catch on, there will be many more options in the market. Aviva has chosen to keep its scheme open only for a limited period, given the interest rate volatility. "All the costs have been factored in before arriving at the 7% return, which is guaranteed by the shareholders," said Aviva chief investment officer Anil Sahgal. He added that because of uncertainty in interest rates, the company has decided to keep the offer as a scheme open for a limited period because of the uncertainty over interest rates. Insurers said sales of guaranteed return bonds could take off if investors believed that interest rates will come down in future. Insurance products could offer higher returns but they have to factor in the reinvestment risk. In other words, the interest payment that an insurance company receives from its investments will have to be again invested in bonds that generate the promised returns. Since future interest rates cannot be guaranteed, companies set aside some capital to cover the interest rate risks on reinvestments. Insurers say introducing such guaranteed return products would be easier if the government issued zero coupon bonds in the market. Even if the government did not issue zero coupon bonds, the market could create zero coupon bond-like securities if the central bank permitted the introduction of STRIPS (separate trading of registered interest and principal in securities) — a mechanism, which allows bond dealers to buy a bond and resell it by separating the interest and principal repayment. -- Visit site at – http://investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Forums- http://forums.investorline.co.in/ Iwebs Open Source Web Publishing Platform - http://webs.investorline.co.in/iwebs/ --~--~---------~--~----~------------~-------~--~----~ Get latest market updates & search internet right from your browser-download our toolbar here- http://investorline.ourtoolbar.com/ Visit our site at – http://investorline.co.in/ Newsroom: http://newsroom.investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Journal - http://research.investorline.co.in/ Newscatcher- http://catcher.investorline.co.in/ Interested in Financial Planning-Let us Contact you- http://spreadsheets.google.com/viewform?key=pb_z4f1_zGMg4iBBFT3-SWQ&email=true If you like the site then promote it here- https://www.freetellafriend.com/tell/?url=http://investorline.co.in/blogs/news Create your own free blog on- http://investorline.co.in/blogger Visit this group at http://groups.google.com/group/india-investor -~----------~----~----~----~------~----~------~--~---
